What Will it Mean for Investors if the DOL Rescinds its Fiduciary Rule?
As the Department of Labor (DOL) conducts a review of its fiduciary duty rule for retirement investment advice, a question being asked is what will happen if the DOL ultimately decides to rescind its rule? Some posit that it will not really matter for investors given the changes already being made by service providers.
Trump Administration Directs Review of Rule’s Effects
Adopted last year and scheduled to become effective on 10 April 2017, the DOL postponed its fiduciary rule for 60 days to conduct a review as directed by the Trump administration in its 3 February 2017 memorandum. The central issue of the mandated review is whether the rule “may adversely affect the ability of Americans to gain access to retirement information and financial advice.”
The memorandum directs the DOL to take actions to rescind or revise the rule if it concludes that (1) the rule will reduce accessibility to retirement offerings, product structures, information, or financial advice; (2) anticipated applicability of the rule has caused harmful “dislocations or disruptions;” or (3) the rule is likely to increase litigation and lead to higher prices to access retirement services. Given that any one of these conditions requires the DOL to take action, it is likely that the DOL will decide to revise or rescind the rule following its review.
Position of CFA Institute
We have continued to support the aim of the DOL’s fiduciary rule to put investors’ interests first. As a fundamental principle, investors who pay for advice should know that the advice they receive is in their best interests.
In two recent comment letters filed with the DOL, we advocated against both delaying the 10 April implementation date and rescinding the rule, arguing that the DOL had conducted a thorough and sufficient legal and economic analysis of the rule when adopting it in 2016. And until the SEC takes steps to create a fiduciary standard that applies to all financial investment advisers, the DOL rule serves an important role in requiring retirement advice providers to act in their clients’ best interests.
Opponents of the rule continue to argue that it will harm smaller investors by limiting their access to retirement advices and services. Even some supporters urge a longer delay in implementing the rule to allow the DOL additional time for what they anticipate will be substantial revisions, if not a total recall of the rule.
Effect on Investors
So, where does the uncertainty over the fate of the rule leave retirement investors who were to benefit from a rule that finally required their “advisors” to put their best interests first, rather than profiting at their expense? Actually, in pretty good shape.
If the rule is not implemented as adopted, not all is lost. Two primary forces have produced a new environment, thanks to the DOL’s work in creating this rule.
Media attention to what it means to be a fiduciary has educated investors in a way no symposium could have. Investors are now aware of the varying standards of care for advice, and many are asking their advisers what standard they use. This alone is propelling a move toward a higher standard in the industry; to remain competitive, advisers will increasingly need to adopt a fiduciary advice standard or risk losing both current and prospective clients.
In addition, service providers have stepped forward to offer smaller investors a range of new products and services. In anticipation of the rule’s implementation in April, the new product offerings include hybrid human/robo advisers, lower commissions and sales restrictions, more fee-based models, changes to product lines and distribution mechanisms, the development of “clean shares” and “T shares,” lower fees, and greater transparency. This heralds a new wave of innovation, dispelling arguments that the smaller investor will be left without options.
Demands from educated investors and the creation of services and products aimed at the smaller investor will not suddenly go away, but they are taking root in a new investing environment. It is reasonable to expect that providers of new products and services will recognize the growth potential of this sector of the retirement market and continue their innovations. And as investors continue to become more aware of the fees they pay and the accompanying standards of care, they will take a more active role and demand that their advisers put their interests first. Wasn’t this what the DOL rule set out to accomplish in the first place?
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